Global FX: Central banks take centre stage

[MUSIC] Hello and welcome to this at any rate podcast. I'm your host, Rindam Sandhileer from JP Morgan's FX Strategy team. I'm joined today by my colleagues, Junietanase Patrick Locke and Octavia Popescu to discuss what looks like. A full slate of central bank meetings next week, but just as a recap of the week gone by, there were a few things that we potentially learned that we can store as lessons for next week. First, despite softish CPI and PPI prints in the US, there were other pockets in DM like Norway, like Japan where you did get some inflation numbers, not always tier one, which did surprise to the upside. So I guess this pan-DM issue of inflation will remain alive for central banks in coming months, and we'll grapple with this as we go along. Second, I think the market was genuinely surprised by the hawkishness of the ECB staff forecast regarding this week alongside the widely anticipated 25 basis point rate hike. The question is if Europe can revise up its core inflation outlook by two tens, after accounting for a hawkish rate part, despite being a relative casualty of the energy shock. What does that say about the respective price pressures in other parts of the world where these price pressures are a lot less acute? And then we did get late weeks on Iran-Pisteer-related headlines. I'm not really sure how much we want to discuss that particular issue, despite their obviously material effects on rates and effects, because we've seen these headlines, gotten many headfakes over the last three or four months. Unless we forget 48 hours back, the concern in markets was often ugly or escalation. But it is notable that Brent is now trading well below $90 a barrel at the time of recording this podcast. There was some news earlier in the week that flow of energy through the trade was greater than at any point since the war began. So it's not surprising that risk markets have taken these developments particularly well. And FX-CADY has had a good run in the last 36 to 48 hours. But I said that US real yields are still net high on the week, and the dollar does still screen cheap relative to rates as we have been mentioning on this podcast for the last several weeks. So going into next week's very crucial Fed meeting, we like this kind of set up this semi-barbell suite of views where we are bullish on both FX-CADY and the dollar simultaneously in dollar, particularly versus the low-eaters. Which for you, Patrick Locke, is a convenient segue into the discussion on next week's Fed meeting. And obviously, several moving parts with a new chair at the helm. So I'll just leave it to you to discuss this in any way you deem fit, how you basically seeing dollar risks around the event and filter all your views through that lens. Yeah, thanks, Rindam. Look, it's a major event next week. There's no other way to put it. I think, as you've kind of said, we have some pretty definitive clarity on what the rate decision is going to be. But after that, I think it's anyone's guess. So I definitely have some thoughts. But I think I'm taking a particular degree of humility into this event, given it's chairworship's first, and we've only really heard from him so far in a Senate banking testimony. But look, I would start by framing it with kind of like what has changed in the kind of the months since his original nomination. First and foremost, you've had the energy inflation shock. You know, the course spillover in the CPI so far hasn't been all together that bad. According to evidence this week, CPI though, we're seeing some upside surprises. We've taken up our core PCE forecast. The 30 basis points, which is still reasonably firm. And then maybe even the bigger delta is, you know, not only labor market stabilization from the last couple of months, but packing on kind of the revisions to last week's NFP. The three-month trend is actually looking reasonably strong compared to what we had thought we had been looking at back in January. So those two things together paint obviously a reasonably different picture of the U.S. macro condition as he takes, you know, the seat this week, and how and whether that kind of like influences his tone in the press conference is obviously going to matter a great deal. Just, you know, we're still waiting on our on our economist forecast and a preview for the meeting, but just kind of like mechanically, you know, I always start with the SEP first, what we might expect to change. We've taken down our year-end unemployment rate forecast to 401. The Fed's last SEP estimate was 4.4 in the median for the U rate. So perceivably, there's some room to move down. Wouldn't shock me if you have activity GDP estimates nudged up a little bit. We'll see what happens on corn headline inflation estimates. But again, all of that continues to point to, you know, to a more constructive and firmer backdrop than we had at the March SEP. So in terms of dots, then, you know, certainly I think most people are expecting the median cut to be neutralized for 26. TBD on what happens in 27, you know, is that neutralized as well, does it still have a split committee that on median continues to look for one E's next year. I think the dispersion next year is certainly probably going to be messy. There could be some hikes, there could be some cuts. But, you know, kind of like the extent of the dispersion and the clarity of that signal, I think, will ultimately matter for the dollar here. And then obviously all of that kind of segues into what the press conference looks like. And, you know, I think we're all treating this as really kind of the most important thing for the dollar here. You know, ultimately a question of whether he leads into the idea that, you know, inflation is obviously meaningfully firmer than it was a few months ago, meaningfully above target that I think would be received well from the dollar side. You know, more dovish and dollar bearish would be, you know, kind of looking at, you know, the forward-looking prospects for inflation, disinflation rather via, you know, AI productivity, anything like that. Hard to say in advance exactly kind of like, you know, what kind of line he will tow. But I think there's a decent amount to play for on the dollar side out of that press conference. And then the final thing I would say is that, you know, if he does kind of lean more into the firm inflation kind of story, you know, if the dots are looking for less easing rather than more, you know, I would kind of like come back to what you said about dollar fair value against rates. Certainly over the last month it is lagged kind of the outright and relative repricing that we've seen in real rates, for example. And you could perhaps attribute some of that to a risk premium around kind of the Fed and kind of, you know, market participants and wait and see mode to see how to treat the dollar after the June FOMC. It stands to reason that perhaps if it is a less-davish, slightly more hawkish, I'll come on net that the dollar perhaps could start to retrace some of that misvaluation. So even if the short end doesn't itself reprise a whole lot, maybe the dollar gets a little bit of tailwind just on the valuation side of things. So I guess that's, excuse me, to lean into a slightly kind of like dollar positive risk profile in the next week, but I think realistically it's pretty reasonable to have a fairly square position going into this and just waiting to see what the new landscape looks like after next week. I agree with almost everything that is said there are bad pressure, I think it's going to be a blogbuster. Then I'm seated here in Singapore where clients are thinking nearly 100% of our client base is going to be up at 2 a.m. light so beyond in many parts of the city and suspect they're going to give the world cup or run for it as money as far as television ratings go. But yeah, look, I think the big question we're trying to answer is really here the degree of his orthodoxy, right? And that depends on the incoming tone of the of the SAP as well as how he characterizes it as he laid out. Now I suspect markets will be pushing to see how receptive he is, how open he is to the idea of opening up the right inside of the US rate distribution in a more material way, right? Because I mean, I think that's the thing that will eventually drive rates and effects in a big way. For at least two reasons, from an FX perspective that has yielded to in some of your previous comments and writings, you know, once the Fed decides to hike, whenever that is, they tend to go big. So just looking at the last five hiking cycles, the smallest Fed hike was in '99. It was 175 basis points cumulatively and despite the huge repricing we have seen in Fed expectations since the end of February when the war began, current terminal pricing in level terms is for 34 basis points of hikes, right? So an orthodox Fed cycle is certainly not in the price and in the spirit of preparing for a Fed-type cycle, again, whenever that is, New Van and Ann, as analysis this week in our weekly publication, trying to study what the dollar does in the anticipation of such moves. And the lesson there is that there is an appreciable four to five percent dollar of Y rally between T minus six months to call it T plus one month around the first hike. And this is kind of a very consistent pattern across the last four or five cycles. So far economists are right that the first hike is not till September 27th and the that dollar appreciation window isn't yet open and it doesn't open till March of next year. The market is right that you could get a hike as soon as tail end of this year then that window is already open. I suspect we'll split the difference in the truth is somewhere in the middle, which means that at several points in the second half of the year we'll have to grapple with this question more heavily. But I guess we leave the Fed there for now and maybe Junior turning to you, same question for you as the one that I post to Pat perhaps the risks are not as dramatic around next week's BODM PM as the other Fed. But how do you see end risks around next week's meeting are you expecting the meeting to be leaning more hawkish or dovish and then you can't really separate more of intervention risks from BODM decision scanning. So how do you read intervention risks in the aftermath of the meeting? - Thanks, Arindam. I had a question. Let me start with BODM after. We expect BODM to raise policy later by 25 basis going to 1.0% next week. But this is already a fully-pressed thing and it's unlikely to be a market mover. Instead, market attention is on the deputy governor which does the press conference and the decision about QT strategy. At the conclusion, the harder for delivering a hawkish surprise at this time is extremely high. And we see risks skewed toward an outcome being perceived at Davish accompanied by Yen Seri. As for the deputy governor which does press conference to deliver a hawkish surprise, he needed to clearly signal an acceleration in the pace of rate hike or hike to the level above the neutral rate. But I think it is unlikely that such a message will be delivered under the current condition. On QT, the key focus will be the strategy as from April next year and onward. We view it as reasonable to slow the current reduction pace as from 200 billion yen per quarter to 100 billion yen. But the media reports suggest that a reduction could be halted as from April next year if reduction are halted. As the media said, the market would likely interpret this at Davish. From different perspectives, we believe that one reason why recent rise in expectation for B.O.J. data hikes reflected in the one year, one year, or three year, one year, so far. Has been accompanied by the Yen depreciation, not to buy the Yen depreciation, is the market view that under the Takaic administration, B.O.J. monetary policy could fall behind the curve. And under this environment, Yen depreciation would accelerate at some point in the future. And the B.O.J. will eventually host to raise weight aggressively to contain Yen weakness. To change this perception and enable later hikes' expectation to lead to Yen's trends, B.O.J. communication alone may not be enough. And the government may need to clearly change their stance to add B.O.J. monetary policy. Regarding both intervention, if the Yen brakes above the 160 point summary, the recent high market just before most started intervention on April 30, and moved towards the cycle high at the land 162, I think it is likely that we will see another land of Yen buying intervention. The main question right now is how much the move can spend intervention more. The move has described that intervention carried out in April and May total about 12 trillion yen. This already exceeds 2022 amount, and is approaching the 15 trillion yen seen in 2024. I think in situational constraint, not particularly binding. And if Japan's authority strongly wants to do it, in theory, intervention much more than 15 trillion yen as marked in 2024, the 30 trillion-- 40 trillion-- would be possible. However, I believe authorities have the one to avoid materially deducing outstanding amount of effects reserves, which would trigger market doubt about Japan's capability or additional intervention. This concern would effectively limit the room for intervention from here. And this view is correct. The cumulative intervention amount will likely be kept at around 2022, 25 trillion yen at most. This suggests that any future intervention would be kept at roughly the similar scale as what had already been conducted about 12 trillion yen. Given that the rent declined after the cities of intervention conducted in April and early May was fully divorced, within less than one month. The impact of any future intervention is also likely to be limited as well. When assessing the impact of biogeolite hike and both intervention, it might be useful to compare with episode in the summer 2024. At the time, the rent declined by more than 20 a year, partly driven by the biogeolite hike and both intervention. However, there are several important differences between 2024 and now. It suggests that probability over similarly large end-application this time is quite low. First, in 2024, the both biogeolite hike and the most intervention were surprises. While this time, they are already priced into a certain extent. Second, in 2024, the US dollar was broadly sold, amid the rising expectation for FedCut, following the weak US job data, which contributed to decline to the rent as well. By contrast, the since last Friday's strong job data, the market has begun to price in FedLatehikes, and the US dollar has been trading firmly. Finally, in the current environment, any large scale-on-winding of the end-shot position, like one seen in 2024, is unlikely. In addition, the size of the end-shot position itself appeared to be smaller than that in 2024, with the latest IMF end-shot position estimated at roughly 70% of the 2024 peak level. That's for me. Thank you. All right. Cool. Thanks for that, Junior. Octavia, you have not one, not two, not three, but four central bank meetings next week. So I leave it to you to discuss what you expect from these, and particularly focusing on the ones where you think risks are more life for European FX. Plus, I guess you also have some political events that are unique of the world's joint use. So just throw it all at you and pick up whichever parts of it, feel more relevant for your currencies. Hey, random thanks. Across European FX, I'd say the Skandys are the most life story for next week, among the central banks. So there are risks que hawkish for Nokia and Davish for stock. And overall, it is likely to underline the monetary policy divergence between the two there. So Nordes Bank inflation remains sticky. We had another core and wages overshoot this week. And markets are only pricing one hike for the year, which I'd say is at the lower end of a plausible range considering their ex anteinflation pressures. So they symmetry on guidance as well favors the crown. And there's always the off chance they actually surprised with an early hike again. And then on the risk bank, our economists are expecting them to shift to a tightening bias, possibly signaling a hike this year. But rates markets are already pricing more than that. So even after the global rates rally, it's still around 30 basis points price for this year. And with inflation and growth running substantially below their forecasts, I'd say the bar for the risk bank to actually outhawk markets as high. And even on a hawkish surprise, stock might benefit near term. But I don't think it changes the big picture for it because ultimately globally, carry is low. Equity went in versus the US is against it. And the regional growth and fiscal dynamics remain unsupportive. And arguably, the Fed this same day has more potential as well to move Euro stocky than the risk bank itself. So we'll be wait, watchful for that, considering its correlation with US yields. And of course, there's the geopolitical developments for both of them, which will be tactical drivers on the week for both scandies. Turning to the SNB, I'd say risks likely skew net dovish. If anything, I don't think they do much that would actually make you rethink bearish Swiss views. Because markets are pricing around two thirds of a chance of a hike for this year, which I don't think the SNB would be suggesting next week. Instead, considering ex oil, inflation pressures don't seem to have changed. And we're still at the lower end of the inflation target band. They'd probably want to keep signaling flexibility, but patients similarly to the last thing, so us not to invite currency strength either. And lastly, moving to sterling, James and Alan talked at length about the BOE and the Maker Field election on the podcast yesterday. So I'd refer you to that. But the bottom line is that for the BOE, there are modestly hawkish risks that underline sterling scary. But-- It may also be overshadowed by headlines around the by-election going on. And ultimately there we think it will be a while until you get a change in rhetoric on fiscal policy and that's what will actually matter for sterling rather than say the vote count itself. And in the meantime until we get that shift, the market sterling shorts can be continued to be frustrated by you know carry positioning and data resilience there. Very good. So plenty of moving parts to look forward to I guess just to round up central banks within DM in my neck are the words we have widely anticipated RBA hold next week which is why I didn't bother to get Ben Jarman on this podcast on a Friday night in Sydney. I know there has been some local chatter out of Australia that some domestic banks have begun to raise the prospect of RBA rate cuts in the back half of next year but A that is next year and B we don't be surprised if the thrust of Governor Bullock's press presser next week is going to be on the near-term challenge of inflation second round effects from the large wage increases announced earlier in the year and therefore implicitly kind of pushing back on the idea of any imminent rate cut. I shouldn't mean a huge deal for Aussie though where we think that the tone of risk markets exactly the kind of stuff that he pointed out to Oktavia showed drive sentiment around Aussie and fingers crossed I think we've probably seen the worst of the risk market weakness that was in train for the last couple of weeks or so. All right let's leave it there for this week boys and girls thanks to all our listeners for tuning in. This communication is provided for information purposes only. Please refer to JP Morgan research reports related to its content for more information including important disclosures. 2026 JP Morgan Chase and Company all rights reserved. This episode was recorded on June 12th, 2026.